How South Korea Became a Consumer Product Juggernaut

Abby Schultz|Special to CNBC.com

Monday, 16 Jul 2012 | 2:39 PM ETCNBC.com

SHARES

South Korea’s economy and markets are dominated by export-oriented companies, particularly those that are now household names in the U.S. — consider Samsung Electronics , LG Electronics,Hyundai Motorsand Kia Motors .

But it’s not only consumer electronics, information technology and autos that dominate Korea’s export sector. The nation also depends on materials and industrial goods for exports. Some of the biggest are: Posco , a steelmaker, LG Chemical , a chemicals manufacturer, and Hyundai Heavy Industries , a machinery maker.

These companies have solidified their global presence based on consistent product offerings that typically provide customers with quality goods at competitive prices. Many Korean exporters have also made inroads beyond the U.S. and Europe, to emerging markets such as China, India and Brazil that many analysts expect will continue to fuel their growth.

“Korea has been improving its brand image, and the quality (of its products) has improved quite a lot,” says Michael Oh, portfolio manager at Matthews Korea Investor.

R&D Culture

One reason for Korea’s shine is a decision by many of its companies to fund research and development, even when times are tough. Korea is “one of the few countries increasing R&D, while other countries have been cutting back,” Oh says.

The best example of how this benefits Korea is in the auto industry, which has steadily gained market share at the same time it has cut back on buyer incentives. That’s allowed the automakers — Hyundai Motors and Kia Motors — to remain profitable even as their combined market share of 9 percent holds steady, says PJ Yoon, auto analyst at Samsung Securities.

Hyundai and Kia also benefit from their strategy of diversifying beyond developed markets. Vehicle sales for both automakers are far more geographically dispersed than for any other automaker, with manufacturing plants as well as customers in several emerging markets, including India and China, says Yoon.

The strategy buffers the automakers from the economic travails of individual markets. “That’s one of the key strengths Hyundai and Kia have,” he adds.

“People may not want a brand new car, but they will spend on parts to keep their old car going,” Harriss says.

Information technology is another key industry in Korea that’s benefited from R&D spending. Samsung Electronics is one of the best examples: After an aggressive and expensive push, the tech firm dominates the smartphone and semiconductor markets, with cutting edge technologies.

Samsung should continue to dominate the smartphone market for the near term, too, as it is best positioned to take advantage of some of the trends in the market, including the growth of the “low-end” smartphone market, according to Mark Newman, senior analyst at Sanford C. Bernstein.

“Key success factors are now much more about having broad product portfolio, flooding the market with various choices at various price points all the way from high end to low end, being cost competitive, and having distribution across all geographies,” Newman said, according to a summary of a recent conference call with investors.

Park Ji-Hwan | AFP | Getty Images

POSCO headquarters in Seoul, South Korea.

Samsung is also “one of the few survivors in semiconductors,” he adds. The company’s semiconductor business dominates in DRAM \(dynamic random access memory\) for personal computers, and flash memory, used in smartphones and ultrabooks.

This technical and strategic dominance in a “very capital intensive” industry makes it difficult for competitors to catch up, Oh says.

Emerging Exporters

The nation also has an emerging class of stocks that are making inroads as exporters, and which market analysts at Samsung Securities expect could lead a second export boom for Korea.

Other companies that have catered to domestic consumers in Korea could gain traction as exporters if Korea’s global brand image continues to improve, thanks to favorable views of products and the success Korea has had in appealing to consumers in other Asian nations, says Oh.

Korea has a “natural advantage when it comes to consumer products” in Asia, he says.

An example in the Matthews portfolio is Orion Corp., a snack manufacturer that has been moving into mass consumer markets in China, Vietnam and Russia.

Orion discovered that it could export to China the same products it sold to its Korean customers and “not really change their marketing strategy,” Oh says.

As the firm’s analysts wrote: These companies “have consistently offered products that reflect an understanding of consumer needs, and are likely to do well overseas.”

But some analysts think domestic-oriented companies, including banks and insurance ones, will gain attention from investors, as Korea’s policymakers shift focus to growing domestic industries as a means of spurring jobs growth, according to JPMorgan’s Asia Pacific Equity Research.

Oh likes Korea’s life insurers now, given that the average income in Korea is half that of Japan, and should continue to grow.

“We’re focusing on companies and industries that will benefit from growing income growth in Korea,” he says.